Gutting Pensions to Spite Guns

Chicago hurting pensions to prove political point

Several of the nation’s most imperiled pension funds have cut off investments to profitable weapons manufacturers in the midst of the controversial gun control debate.

The boards of Chicago’s municipal employees’ and teachers’ retirement funds voted to withdraw hundreds of thousands of dollars in gun company holdings. Chicago has some of the most stringent gun control laws in the country, as well as the highest murder rate in the nation. It also has some of the most severely underfunded pension systems.

Andrew Biggs, a scholar at the American Enterprise Institute and former Social Security administrator, said that the board might have broken the law by withdrawing support from profitable, yet politically unpopular companies.

“I’m not convinced of the appropriateness nor the legality of these actions,” he said. “Their commitment to the people in the plan is to maximize the value of investments to make sure benefits are paid for, so employees don’t end up having to pay the difference through contributions.”

Gun stocks have skyrocketed in the past decade due to increased demand.

Smith & Wesson’s stock has quadrupled in price since 2003, including 65 percent growth in the last 12 months. Sturm & Ruger grew by nearly 30 percent in 2012, quintupling in price over the last 10 years. The Municipal Employees’ Annuity and Benefit Fund (MEABF) and the Chicago Teachers’ Pension Fund (CTPF) voted in January to drop more than $1 million in those companies, as well as smaller gun manufacturers.

Jonathan Ingram of the Illinois Policy Institute accused the board of scoring cheap political points at the expense of worker welfare at a time when the city is more than $25 billion short of meeting its obligations to public employees.

“This is symptomatic of the entire Illinois pension crisis,” he said. “The retirement savings of government workers is controlled by politicians and politicians do what makes political sense, rather than fiscal sense.”

Illinois state law requires that pension fund managers make investment decisions based on the interests of members. The teachers fund’s investment guidelines say the board must makes decisions “solely in the interest of the members and benefit recipients and for the exclusive purpose of providing benefits and defraying reasonable expenses incurred in performing such duties, as required by law.”

Jay C. Rehak, president of the CTPF board of trustees, said that while investment growth is important, the divestment reflected the ethical standards of the workers.

“We are fiduciaries guided by the recognition that we act with the obligation to protect fund assets and minimize investment losses,” he said in a statement. “We are also teachers, in classrooms and schools every day, and many of us unfortunately understand all too well the tragedy of gun violence. In the last academic year, 319 Chicago Public School students were wounded by guns, and 24 died from gun violence. These aren’t just tragic statistics—these are our students.”

Biggs blasted Rehak for not including workers input on the decision.

“They may dress this up as an investment decision, but it’s a political decision made in violation of their legal and moral obligations to their beneficiaries,” Biggs said. “It’d be one thing if participants voted to divest; instead pension mangers voted to make themselves feel good at the expense and the financial well being of workers.”

Neither Rehak, nor representatives from the MEABF returned requests for comment.

Mayor Rahm Emanuel is calling on the city’s financial community to take further steps to hurt gun companies. Emanuel, President Barack Obama’s onetime chief of staff, urged banks to halt lending to gun companies and later pressured mutual funds to “blacklist” manufacturers from their portfolios.

One financial professional, who requested anonymity because of his company’s involvement in the bond market, said Emanuel is threatening more than just gun companies.

“It sounds like a veiled threat that if you want to do business with or in Chicago, you better not have any gun holdings,” the source said.

Emanuel’s office did not respond to multiple requests for comment.

Ingram, who supports converting the traditional pension systems into 401(k)-style retirement accounts, said the state and city must reform the system to empower its workers.

“We need to give workers control over where they invest,” he said. “It doesn’t make sense for the government to make these decisions or to pressure money managers on how to invest.”

Bill McMorrisEmail Bill | Full Bio | RSSBill McMorris is a staff writer for the Washington Free Beacon. He joins the Beacon from the Franklin Center for Government and Public Integrity, where he was managing editor of Old Dominion Watchdog. He was a 2010 Robert Novak Fellow with the Phillips Foundation, where he studied state pension shortfalls. His work has been featured on CNN, Fox News, The Economist, Colbert Report, and numerous print publications and radio stations. He lives in Alexandria, Va, with his wife and three daughters. His Twitter handle is @FBillMcMorris. His email address is mcmorris@freebeacon.com.